As always, the devil is in the details. That was the overall conclusion of a public hearing on the illicit tobacco trade in Europe organized by MEP Cristian Silviu Bușoi in the European Parliament on January 29th. Bușoi has emerged as one of the most vocal MEPs in the on-going fight to decouple the European decision making process from the influence of tobacco companies, placing himself squarely at odds with the more relaxed attitude of the European Commission. For while much headway has been made in reining in the tobacco industry, recent efforts to further clamp down on the illicit tobacco trade could be derailed by Big Tobacco.
More than 50 participants, such as EC officials and public health advocates, attended the meeting. One MEP, who was not present but distributed a statement at the meeting, was Michèle Rivasi (Member of the Green Group from France). A shot across the bow of the EC, the document strongly criticised the European Commission for failing to respect the demands of civil society to establish surveillance systems for the illicit trade in cigarettes that were strictly independent of tobacco producers.
These surveillance systems are currently riddled with loopholes, which could end up enabling the parallel trade in cigarettes that cheats EU members of billions in taxes. “We are talking about tax evasion in the order of €20 billion, that the EU could claw back in lost tax revenues if it were to successfully clamp down on this illegal trade,” said Dr BUŞOI.
Rivasi’s position hews closely to a wider discussion regarding the proper implementation of the World Health Organisation’s Framework Convention on Tobacco Control (FCTC) Protocol on Illicit Trade. This document, which the EU has ratified, mandates the implementation of strict anti-money laundering mechanisms, stringent licensing and due diligence mechanisms, as well as the creation of a track and trace (T&T) system for cigarettes that is fully independent from Big Tobacco. Such a system would deal a deathblow to both the parallel and illicit trade.
However, the implementation of the FCTC Protocol has not been without controversy within the EU – prompting health advocates to argue that the Protocol is not compatible with the EU’s own Tobacco Products Directive, which allows a degree of influence for tobacco companies in the implementation of the T&T system.
In fact, as was pointed out in the debate, the International Tax Stamp Association (ITSA) has filed a case before the European Court of Justice, arguing that the EU derived regulation is in breach of the FCTC. ITSA’s position is that any T&T system should be placed under the exclusive control of the EC and should neither “performed by nor delegated to the tobacco industry”.
ITSA is not alone. Several other participants, such as Dr Francisco Rodrigues Lozano, the President of the European Network for Smoking and Tobacco Prevention (ENSP) and Anca Toma Friedlander, the Director of the Smoke Free Partnership (SFP), supported that position. Both organization have been highly vocal in the fight against the influence of tobacco manufacturers on the decision making process. The ENSP is committed to bringing smoking rates down to under 5%, while the SFP is working to promote tobacco control and to ensure the correct implementation of the FCTC as a way of remedying the weaknesses of the current EU system.
Luk Joossens, a leading anti-tobacco advocate, pointed to a list of recommendations approved by the SFP and the European Cancer Leagues regarding the technical aspects of the T&T system that would ensure compliance with the FCTC – but that have not been adopted by the EC. In his telling, the unique identifiers of the T&T system should be linked to security features and the data storage providers should not be associated with the tobacco industry. Allen Gallagher from the University of Bath Department for Health singled out Atos, a French company that has been appointed by the EC as unique data storage provider, as having ties to the tobacco industry that render it incompatible with the FCTC.
Leszek Bartlomiejczyk of the ENSP struck a similar tone. “We need to control the whole legal supply chain,” he said, “and this involves the competent authorities in controlling resources, the production, the physical movement and the trade in tobacco products.” He also emphasized the need for national databases for member states to have their own data control systems. “We must have comprehensive solutions by licensing all elements of the supply chain from the manufacturer to the retailer,” he concluded.
Dr Filip Borkowski, Deputy Head of Unit at the European Commission’s Directorate-general for Health and Food Safety (DG SANTE), opened his statement by rebuffing some of the accusations and defending the EC’s system for cross-border health and tobacco control. He claimed that the EU system is in full compliance with the FCTC protocol. “We think our system is up to the job required by the terms of the Directive,” he told the Parliamentary Hearing.
Referring to the shortcomings of the T&T system identified by some participants - such as Mr Joossens’ comments on its incompatibility with the WHO Protocol - Mr Borkowski mentioned that the Tobacco Products Directive and all its provisions will be subject to a review in 2021. The SFP had written about this in 2017, in the wake of the Commission’s adoption of the act, which foresaw the modification of the EU system to close its loopholes and bring it in line with the FCTC protocol.
Concluding the debate, Bușoi said that he intends to push for a review of the Tobacco Products Directive in the next legislature after the May elections for the EP. It is for this reason that he initiated a consultation in 2018 and organized Tuesday’s debate. The objective would be to strengthen efforts to fight against the parallel trade of tobacco products in Europe and bring forward comprehensive new proposals to this effect.
Why there should be no harmonized excise duties on nicotine-free e-cigarettes in the EU
Since 2016, the European Commission has been working on a revision to the Tobacco Excise Directive, the ‘TED’, the legal framework ensuring excise duties are applied in the same way, and to the same products, throughout the Single Market, writes Donato Raponi, honorary professor of European Tax Law, former head of excise duties unit, consultant in tax law.
Member states, through the Council of the EU, recently asked for a range of new products to be contained within the TED. It includes e-cigarettes which contain no tobacco but do contain nicotine. However, there are also e-cigarettes with no nicotine in them and their fate is unclear.
But why should a directive that has, until now, been only for tobacco be extended to include products which contain neither tobacco nor nicotine? Isn’t this a step too far?
The EU's constitution, enshrined in the Treaties of the European Union, is very clear that before proposing any legislative initiative, some key questions must be addressed.
The EU rules1 explain very clearly that products should be included in the TED only to ensure the proper functioning of the internal market and to avoid distortions of competition.
It is by no means clear that a harmonized excise treatment of nicotine-free products, such as nicotine-free e-liquids, across Europe will help to alleviate any such distortions.
There is very limited evidence on the extent to which consumers view e-liquids without nicotine as a viable substitute for e-liquids with nicotine in them. The European Commission’s recently published Eurobarometer study on the attitudes of Europeans towards tobacco and electronic cigarettes has nothing to say on this question. And the evidence from the available market research experts is limited at best.
It is, consequently, virtually impossible to know how many consumers – if, indeed, any at all – would switch to e-liquids without nicotine if only nicotine containing e-liquids were subject to an EU level excise duty.
What we do know, however, is that almost everybody who consumes tobacco products already covered by the TED does not view nicotine-free e-cigarettes as viable substitutes for them. And that is why most cigarette smokers who switch to alternative products look for other products containing nicotine.
There may be parallels between this and the excise treatment of alcohol-free beer, the latter not being, covered by the EU Alcohol Directive. Although it is designed to be an alternative product, this does not mean that alcohol-free beer is viewed as a strong substitute by most of the people who drink alcoholic beer. Member states have not applied a harmonised excise on alcohol-free beer and so far, the effective functioning of the Single Market has not been damaged.
Even if the absence of a harmonized excise on nicotine-free e-cigarettes were to distort competition, it must be material enough to justify any EU level intervention. Case law from the CJEU confirms how distortions of competition must be ‘appreciable’ to justify any changes to EU legislation.
Simply put, if there is only limited impact, there is no rationale for EU intervention.
The market for e-cigarettes without nicotine is currently very small. Euromonitor data shows that nicotine-free e-liquids for open systems represented only 0.15% of all EU tobacco and nicotine product sales in 2019. Eurobarometer reveals that while nearly half of Europe’s e-cigarette consumers use e-cigarettes with nicotine every day, only 10% of them use e-cigarettes without nicotine daily.
With no clear evidence of any material competition between nicotine-free e-cigarettes and the products already covered in the TED, together with the low sales of nicotine-free products, the test of there being an ‘appreciable’ distortion of competition is not – at least at the moment – obviously being met.
Even if there is no case for new EU-level legislative measures for nicotine free e-cigarettes, this does not stop individual member states from levying a national excise on such products. This has already been the practice across member states so far.
Germany does not, for instance, need an EU Directive to levy its domestic excise on coffee, while France, Hungary, Ireland and Portugal levy a tax on sugary drinks without any EU Soda Excise Directive in place.
The case of non-nicotine e-liquids is no different.
There is nothing to stop any member state from taxing non-nicotine e-liquids at its own pace without the unnecessary intervention of the EU.
1 Article 113 of the Treaty on the Functioning of the European Union
Illicit tobacco trade: Nearly 370 million cigarettes seized in 2020
International operations involving the European Anti-Fraud Office (OLAF) led to the seizure of nearly 370 million illegal cigarettes in 2020. The majority of the cigarettes were smuggled from countries outside the EU but destined for sale on EU markets. Had they reached the market, OLAF estimates that these black market cigarettes would have caused losses of around €74 million in customs and excise duties and VAT to EU and member state budgets.
OLAF supported national and international customs and law enforcement agencies from across the world in 20 operations during 2020, in particular providing vital information on the identification and tracking of lorries and/or containers loaded with cigarettes misdeclared as other goods at the EU borders. OLAF exchanges intelligence and information in real time with EU member states and third countries, and if there is clear evidence that the shipments are destined for the EU contraband market, national authorities are ready and able to step in and stop them.
OLAF Director-General Ville Itälä said: “2020 was a challenging year in so many ways. While many legitimate businesses were forced to slow or halt production, the counterfeiters and smugglers continued unabated. I am proud to say that OLAF’s investigators and analysts played a vital role in helping to track and seize these illegal tobacco shipments, and that OLAF’s cooperation with authorities across the globe has remained strong despite the challenging conditions. Our joint efforts have not only helped save millions of euros in lost revenues and kept millions of contraband cigarettes of the market, they have also helped us get closer to the ultimate goal of identifying and closing down the criminal gangs behind this dangerous and illegal trade.”
A total of 368,034,640 cigarettes destined for illegal sale in the EU were seized in operations involving OLAF during 2020; of these 132,500,000 cigarettes were seized in non-EU countries (primarily Albania, Kosovo, Malaysia and Ukraine) while 235,534,640 cigarettes were seized in EU member states.
OLAF has also identified clear patterns with regard to the origins of this illicit tobacco trade: of the cigarettes seized in 2020, some 163,072,740 originated in the Far East (China, Vietnam, Singapore, Malaysia), while 99,250,000 were from the Balkans/Eastern Europe (Montenegro, Belarus, Ukraine). A further 84,711,900 originated in Turkey, while 21,000,000 came from the UAE.
The main cigarette smuggling operations reported by OLAF in 2020 involved collaborations with authorities in Malaysia and Belgium, Italy and Ukraine, as well as a number involving authorities from across the EU and elsewhere.
OLAF mission, mandate and competences
OLAF’s mission is to detect, investigate and stop fraud with EU funds.
OLAF fulfils its mission by:
- Carrying out independent investigations into fraud and corruption involving EU funds, so as to ensure that all EU taxpayers’ money reaches projects that can create jobs and growth in Europe;
- contributing to strengthening citizens’ trust in the EU Institutions by investigating serious misconduct by EU staff and members of the EU Institutions, and;
- developing a sound EU anti-fraud policy.
In its independent investigative function, OLAF can investigate matters relating to fraud, corruption and other offences affecting the EU financial interests concerning:
- All EU expenditure: the main spending categories are Structural Funds, agricultural policy and rural
- development funds, direct expenditure and external aid;
- some areas of EU revenue, mainly customs duties, and;
- suspicions of serious misconduct by EU staff and members of the EU institutions.
Tobacco Excise Directive consultation: 83% of submissions warning about higher taxes on vaping
The World Vapers’ Alliance strongly urges policymakers to stay away from equating smoking tobacco and vaping, especially when it comes to taxation. This comes off the heels of a recently ended consultation on the update of the Tobacco Excise Directive, which specified the European Commission’s intention to tax vaping products similarly to how cigarettes are taxed.
Commenting on the consultation, WVA Director Michael Landl said: “Making vaping less appealing to smokers by higher prices will discourage current smokers from switching to less harmful alternatives. This is certainly not going to be of any public health benefit. Additionally, high taxes on vaping products are particularly harmful to the lower income brackets of the population, which make up the largest proportion of current smokers.”
The consultation ended on 5 January and out of 134 responses from citizens, associations and industry, 113, or 84% referenced the positive impacts of vaping and the serious negative impact that taxing it the same as cigarettes would have.
Michael Landl added: “I am delighted by the overwhelming number of responses in favour of vaping to this consultation. It shows that many people know the potential for harm reduction of vaping. . What policymakers need now to understand is that tax hikes on vaping will lead to people switching back to smoking, an outcome absolutely nobody wishes for.”
Therefore, for the WVA it is important that non-combustible products are not regulated and taxed the same way combustible tobacco is. Lawmakers need to follow the scientific evidence and abstain from tighter regulation and higher taxation of vaping products.
“If we want to reduce smoking induced burdens on public health, access and affordability to vaping products need to be guaranteed,” Landl concluded.
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